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Three New Schwab YieldPlus Arbitration Claims Filed

Shine Vernon legal team California co-counsel Thomas D. Mauriello files three new Schwab YieldPlus arbitration claims, seeking recovery of over a half million dollars in losses

Thomas D. Mauriello, California co-counsel with the Shine Vernon legal team, recently filed three new arbitration claims on behalf of California investors who collectively lost more than $500,000 in the Schwab YieldPlus Fund (SWYPX, SWYSX, SCHW) and the Schwab California Tax Free YieldPlus Fund (SWYCX).

Schwab marketed its Schwab YieldPlus Fund and Schwab California Tax Free YieldPlus Fund to retirees and other conservative investors as safe ultra short-term bond funds and alternatives to cash. However, the Funds’ managers over-concentrated the Funds with risky mortgage- and asset-backed securities in the case of the YieldPlus Fund and, in addition, with auction rate securities in the case of the California Tax Free YieldPlus Fund, exposing the Funds to huge undisclosed liquidity risk and other risks and ultimately causing investors steep losses of their principal, the new claims assert.

“With each new claim we investigate and file, we are expanding our understanding of the scope of Schwab’s recklessness and misrepresentations with respect to these particular funds,” Mr. Mauriello stated. “We are putting a great deal of effort into these investigations and the resulting claims to obtain recovery for the individual investor.”

The Shine-Vernon legal team, headed by former SEC enforcement attorney Thomas Shine and longtime investor rights’ attorney Chris Vernon, has interviewed more than 100 investors as part of its Schwab YieldPlus investigation. The team consists of six law firms throughout the United States. The team has filed arbitration claims on behalf of investors in Florida, California, Texas, New York, Missouri, Minnesota, Illinois and Hawaii. While the attorneys on the team have high-level, nationwide experience in securities arbitrations, the firms are small enough to offer personalized attention and care to each client throughout the arbitration process.

These latest claims were filed on behalf of baby boomers and retirees, including an engineer, a journalist, a judge, and two real estate professionals. Two of the claims will be heard in San Francisco while the third will be heard in San Diego. These claims come on the heels of $1 million in investor claims filed by the Shine Vernon legal team in July.

The new claims assert that the reckless actions of the fund managers of the Schwab YieldPlus Fund and Schwab California Tax Free YieldPlus Fund compromised the Funds’ liquidity and exposed investors to substantial risk of losses, while Schwab was marketing these funds as a safe alternative to cash. This set the stage for the catastrophic freefall of the Schwab YieldPlus Fund, as net assets plunged from a high of $13.5 billion in July 2007 to just $679 million on May 31, 2008. Schwab reports that as of May 31, 2009, the YieldPlus Fund’s assets were at $161.72 million. The Schwab California Tax- Free YieldPlus Fund experienced a similar decline in total managed assets, decreasing from $1.201 billion as of July 31, 2007 to $156.68 million (down 86.96%) on August 31, 2008.

The claims include the following allegations:

-- In SEC filings and direct communications with shareholders and prospective investors, Schwab misrepresented the Schwab YieldPlus Fund as an ultra short-term bond fund. In reality, the fund was heavily weighted with floating and variable rate bonds with long- term maturities, which gave the fund a weighted average maturity equivalent to an intermediate term bond fund. During the second half of 2007 and in 2008, when the fund was declining in value, these misrepresentations created the false illusion that if investors held on to their positions for the next six months to a year, the bonds held in the fund’s portfolio would mature at face or par value and the fund and its shareholders would recover most of their unrealized losses.

-- Unlike its peers in the Morningstar ultra short bond fund category, the Schwab YieldPlus Fund failed to maintain adequate cash on hand to meet investor redemptions. Schwab YieldPlus Fund had only 6.5 percent of its portfolio in cash, while its peers in the ultra short-term bond fund category averaged 27 percent of their positions in cash. As more and more investors sought to sell their shares, Schwab had to sell illiquid securities held in the portfolio at distressed prices;

-- Schwab’s senior management changed the Schwab YieldPlus Fund’s investment policy in September 2006 to allow for a higher concentration in riskier mortgage-backed securities and asset-backed securities, without obtaining shareholder approval or clearly disclosing this major shift to investors;

-- Schwab’s management failed to adequately disclose that investors had withdrawn $2.8 billion from the YieldPlus Fund in August 2007. Full and explicit disclosure didn’t come until November 30, 2007 -- by which time the Fund’s net assets had dropped to $8 billion, down from $13.5 billion as of July 31, 2007;

-- Schwab ignored the warnings of securities and banking regulators about the risky nature of mortgage-backed securities and collateralized mortgage obligations, including warnings to refrain from deceptive advertising of such securities including comparisons to certificates of deposits;

-- Schwab embarked on a self-dealing marketing campaign to avert redemptions of Schwab YieldPlus by Charles Schwab retail clients, quietly selling 2.9 million Schwab YieldPlus Fund shares from other Schwab proprietary mutual funds during the period January 31, 2008 to April 1, 2008, while indicating in marketing materials, newsletters, talking points, and other investor communications that unwitting Schwab retail clients should hold their shares.


For information, contact: — Thomas F. Shine, a former Securities and Exchange Commission Division of Enforcement attorney (Florida, 800-838-8320, www.thomasfshinelaw.com); — Christopher T. Vernon, an investor rights attorney who represents investors throughout the United States (Florida, 239-649-5390, www.vernonhealy.com) — Thomas D. Mauriello, an investor rights attorney who represents investors throughout the United States (California, (619) 940-1606, www.maurlaw.com) — Timothy J. Dennin, a former Securities and Exchange Commission Division of Enforcement attorney and former assistant district attorney (New York, 212-826-1500, www.denninlaw.com); Keywords: Schwab YieldPlus Fund, Schwab California Tax Free YieldPlus Fund, Yield Plus, SWYSX, SWYPX, SWYCX, Charles Schwab, safety, negligence, securities attorney, arbitration, mortgage-backed securities, bond fund.

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